Who wants to be a Millionnaire!

I should start from where we ended, the statement : 10% of what you earn before Tax is yours to keep.

Rules apart, lets dive straight into some figures to stress the point. Assuming your annual salary before Tax is 4 lacs and that you will have a salary hike of 10% per annum on an average, what do you have at the end? Oops!!!

But first decide upon a return (from investments) that you expect from the amount before you begin your calculations. I consider a return, well CAGR-Compounded Annual Growth Rate(for details ask me) of 12% is great. "Just" 12% ? Yes, my dear. The reason is quiet simple. The investing genius Warren Buffet when he started off, had a goal of 15% CAGR and he ended up at 23% CAGR in the past 35 years. So, as first time investors, our target of 12% is quiet "high" really!.

Now having selected a rate of return, assuming you save 10% of your Base Salary of Rs. 4 lacs (which increases 10% annually) and a return (from investments) of 12% CAGR, What will I have at the end of 5 years, if I just keep 10% of what I earn every month aside ? Good CAT question. Feel lazy to solve it ? Well let me solve it for you.

First year you will have saved Rs. 40,000 from your pocket and will have a final sum of Rs. 42,151. Doesn't sound too good... :-(

Now your salary has increased to 4.4 lacs and you will save 44,000 the second year and at the end of the year you will have Rs. 93,584. Hey! That's close enough to a lakh!

Third year... your salary is 4.84 lacs and you will save 48,000 that year and at the end of the year you will have Rs. 1,55,400

Fourth Year... your salary is 5.3 lacs and you will save 53,000 that year and at the end of the year you will have :Rs. 2,29,908 !

Fifth Year... Your Salary is 5.83 lacs and you will save 58,000 that year and at the end of the year you will have Rs. 318617

So, finally you would have saved Rs. 2,43,000 and your investment reached at 3,18,617.

So are the returns worth the saving and investing stuff? Well at this point of time maybe it doesn't look that good ... you can't even buy a decent car with the money, but wait... yes, wait... so we will wait for another 10 years and see, what happens to your "save and invest" method.

First thing. From the 5th year onwards you do not "do" anything and let your money work for you .... riches gets you more riches!..

After 15 Years from now you will have : Rs. 9,87,712

After 25 Years from now you will have : Rs. 30,61,907

After 35 Years from now you will have : Rs. 94,91,912

Want to live more??....

After 50 years from now you will have : Rs. 5,22,49,238

Now does THAT sound like something!!! :-)

And all you have had to save (SACRIFICE really by foregoing that extra pizza/jeans/...) is a meagre Rs. 2,43,000!

Can you believe it ? Well perhaps that's why Einstein had said "The Greatest power on earth is Power of Compounding"(PoC).

So, the second thumb rule Ride on PoC !